Trae Stephens: Why No Company is Successful Because of their VC | E1135

1. 0:00 – 5:39

   Intro

   1. TSTrae Stephens0:00

      We don't have Monday partner meetings. Everything is super difficult to get through the investment team, and this is on purpose. The more process you have, the easier that it is to game the process to get to some mediocre outcome. The worst deals are the most competitive deals. They're the ones that are super consensus. It's very easy in retrospect to say, "Wow, we really let that get out of hand," but we're doing the same stupid stuff all over again.

   2. HSHarry Stebbings0:24

      Ready to go? Trey, I am so excited for this. So you've helped me with countless schedules for this show. I've wanted to make this one happen for a long time. So thank you so much for joining me today, Trey.

   3. TSTrae Stephens0:45

      It's a pleasure to be here.

   4. HSHarry Stebbings0:46

      I would love to start with a bit of a weird one, but I wanna start childhood, and parents and teachers see a lot. How would your parents and teachers have described a young Trey?

   5. TSTrae Stephens0:57

      (laughs) Oh, man. Uh, yeah, I- I mean, I grew up in the country. Like I, you know, lived in the woods in a log cabin that my dad literally built with his bare hands. Um, and I was kind of always this kind of misfit, I would say. Um, I- I love where I came from. I love Ohio. You know, it's- it's a wonderful place to be from. Um, and, you know, there was always this like tension that was like pulling me to escape. Um, and my- my... I have an older brother, he's 18 months older than me, and my mom used to say that she had one son that's like, you know, 18 going on 12, uh, being my older brother, and I was like, uh, 16 going on 40. Like I had this kind of old soul from the very beginning. Um, and, you know, I think that it's like I was the British version of an American teenager. Like I- I like-

   6. HSHarry Stebbings1:51

      (laughs)

   7. TSTrae Stephens1:51

      ... was like a 60-year-old in a, in a 16-year-old skin. Um, and, uh, I- I think like I just loved hanging out with adults. I loved sitting around and reading books. I loved like, you know, thinking about philosophy. Um, so I was... I- I would not say that I was like a super cool teenager (laughs) .

   8. HSHarry Stebbings2:10

      I mean, I... That has to be my favorite like phrase to enter, which is that the American teenager in a British body. Um, I- I- I do have to ask, I heard your entry to Georgetown, in particular, is a rather unique story of persistence. So how did you get into Georgetown, Trey?

   9. TSTrae Stephens2:28

      You know, I was, uh, uh... I had, you know, great grades, great test scores. Like, you know, for all intents and purposes, it seemed like I was going to be able to kind of write my story for what I was going to do. But the problem was is I went to a rural public school in the middle of the country, and so it- it's like we don't really talk about this very much as a country, we're focused on other kind of social demographic problems. Um, but it turns out that like you just... it's basically impossible to get into good schools if your guidance counselor doesn't know all of the admissions officers at the Ivy League schools or whatever. Um, and so I sent out a bunch of applications. I think I applied to nine schools, and I got a lot of skinny envelopes back (laughs) . And, uh, I remember on the day that I got the skinny envelope back from five of the nine schools that I had applied to, uh, I went over to my high school girlfriend's house, and I was like, "Well, you know, at least the school that I got, I did get into is next to where you're going to go to school." And she was like, "Yeah, about that," and broke up with me the same day that, uh, that I had gotten rejected at all these schools. So I like went home and just laid on the couch with my face down, and my mom, uh, came over and she's like, "What do you wanna do? Where- where do you actually really wanna go?" And I said, "I wanna go to the School of Foreign Service at Georgetown." And she said, "Well then you're gonna go to the School of Foreign Service at Georgetown," and she put me on a flight and sent me to Washington DC and said, "Go convince the admissions office in person that they should let you in." And so I sat on the doorstep of the admissions office, demanding to see the dean, and eventually the dean came out and he's like, "Who is this crazy person that's loitering on my doorstep?" And I had a backpack full of recommendation letters, admittedly from people that I know now it's like they're probably not even reading these recommendation letters. It's like my, you know, high school cross country coach and things like that (laughs) . They basically just said like, "This is crazy that you flew out here with no plan other than to like demand to speak to me, um, and we're gonna put you on the top of the waiting list, and as soon as we like get the final decisions back from everyone about whether they're going to attend or not, you'll be the first person off the list." And so to my surprise, you know, like a couple of weeks later, I got a call from Georgetown and they were like, "All right. You're in. That was, that was a crazy stunt that you pulled." Um, the funniest part about this whole story though is that the... in my first week at Georgetown, I got, uh, invited to, uh, the president's office to have a meeting. And I thought like, "Wow, the president of the university is crazy," like he meets with every incoming freshman. Um, and so I go and meet with him and he's like, "No, I don't meet with every incoming freshman. I just heard your story from the dean of admissions" (laughs) . And he was like, "I needed to meet you. Obviously, you came from like a, you know, a- a middle class, lower middle class background. What's the financial situation here given your story?" And, uh, I said, "I'm taking a ton of debt." He said, "You know, I can't help you with financial aid, but I can give you a job in the president's office." And so I ended up working for the university (laughs) president all four years that I was in college. It was kind of like a crazy... It went from a bad situation like getting rejected to a situation where I was really set up to, you know, have a completely transformational life experience, uh, in very, very

2. 5:39 – 9:15

   Transformational Life Experiences

   1. TSTrae Stephens5:39

      short order.

   2. HSHarry Stebbings5:39

      You mentioned the transformational life experience there. Does it not also just scare you in the way that bluntly if you hadn't got on the plane, hadn't sat in their office waiting, your life could have been very different?

   3. TSTrae Stephens5:51

      Certainly would have been. I- I think like the- the... Again, this is like something we don't really talk about as a society, but, um, like lower middle class, rural, like primarily Caucasian communities.... are, have just been obliterated by globalization. You know, J.D. Vance talks about this in his book, Hillbilly Elegy. Um, but like, you know, the, y- you see these stats from the elite universities about how many valedictorians they reject. It's like kind of a symbol of pride. It's, it's just this community that they're, that they're rejecting 'cause they have no connections, they have no money. There's no legacy admissions. They get no demographic boosts from accepting these people. Um, and it's, so it's just like I was a stat. I was like one of these people that's like, "Look, we get nothing from admitting this kid with good grades and test scores. Doesn't benefit us in any way." Um, and so I was just that stat to all the places that I applied to college (laughs) . Um, and, you know, I think this is a lot of what has led to populism. Uh, the rise of populism in America is all of these people saying like, "Man, we are just like g- being completely ignored." You know, you see these communities of blue-collar industrial workers that have historically been Democrats, um, that have shifted over to being populist Republicans, and it's because they're just ignored. Uh, and, and I, I feel like I kind of figured out a way through that, uh, uh, genuinely because of my mom's persistence. Um, but I would have ended up going to, you know, a state school and probably working at Deloitte or something. Uh, it's, you know, it's a, a pretty big shift.

   4. HSHarry Stebbings7:30

      And for anyone who works at Deloitte, that's a wonderful career which you should be very happy with (laughs) .

   5. TSTrae Stephens7:35

      I'm not sure that it is, and I'm, I'm willing to, I'm willing to go out on a limb and say that spending your life working for a consultant firm is probably not the path to having the, the most enlightened experience (laughs) .

   6. HSHarry Stebbings7:46

      If enlightened experience is what you're going for, I agree with you. What would you do to change that? This is where I love the show 'cause it's just too interesting. Like that's a problem, okay, what you said, in terms of that, um, neglected population that we don't talk about either because it's not a, a minority of kind of popular terms. What would you do to change that then as an entrepreneur, as a problem solver?

   7. TSTrae Stephens8:08

      Yeah, no. I, I, I think that these things are cultural problems more than anything else. I'm not sure I have like a great entrepreneurial idea behind this. You know, eh, my, eh, my partner here at Founders Fund, Peter Thiel, uh, who I also worked for when I was at Palantir, uh, he's been talking about this for decades, like probably longer than anyone else. Um, and he started a program called the Thiel Fellowship to convince kids to drop out of college based on this idea that the elite universities are distorting, uh, our, our culture and our values. And I, I, I think that, you know, I probably don't have as strong a view on this as Peter does. Like I'm not like in, in a war with elite universities. But I do think that there's some distortion that's happened that requires correction. And, um, that correction is, uh, you know, we've, we've seen this on display actively over the last six months with some of these presidents being fired for kind of feeding into this kind of hysteria in the, in the cultural moment. And I think we, we need to get back to a point where we have some way to, eh, to generate meritocratic outcomes that are good for everyone, not just for like subsets of the population.

3. 9:15 – 17:53

   Transition to VC & Joining Founders Fund

   1. TSTrae Stephens9:15

   2. HSHarry Stebbings9:15

      You mentioned Peter there. I do wanna, before we move into the investing world, just discuss the entry. How did Peter convince you to leave Palantir, and where you were doing very well, to then move into the investing side and join Founders Fund? What's that story?

   3. TSTrae Stephens9:30

      (laughs) You know, I, I, I'm not sure it was an opportunity as much as it was an order. It's kind of unclear. So I was, um, I was heading up what Palantir called the leverage team, which is essentially the sales organization, um, and had been doing that for a while. In that role, I interacted with Peter pretty frequently because, you know, he would wanna know like, "What does our pipeline looks like? Where are we running into problems? Where can we leverage leadership, uh, to, to drive these opportunities to close?" Um, and so he and I became friends, really like bonding around philosophy and theology primarily. And in March of 2013, um, which I had been at Palantir for about six years at that time, um, Peter just called me out of the blue and said, "Hey, we're raising this first billion-dollar fund at Founders Fund. Uh, I would love for you to come join us at, at FF." And, uh, you know, I kinda str- scratched my head. I'm like, "Peter, I have no interest in finance. I don't know anything about venture capital." Also, I'm like, "I literally work for you at Palantir." Like (laughs) wha- what exactly is going on? And he's like, "Eh, eh," you know, like, "You should entertain it. Like I want you to meet other people on the team." And so, uh, I got together with a bunch of folks that are still at, at Founders Fund today, Lorne Gross, who's our COO, Bryan Singerman, who you just had on your podcast a couple of weeks ago. Um, and they were like, "Okay, so why are we talking to you?" I'm like, "You know, Peter wanted me to talk to you." And they're like, "Why are you interested in venture capital?" I'm like, "I'm not actually (laughs) interested in venture capital." Um, "What, what like deals that we've done are you most excited about?" I'm like, "I don't know what deals you've done, so I wouldn't even know what to be excited about." And not surprisingly, coming out of these very, very bad interviews, um, it like dra- the process dragged for nine months. And then eventually, I just get (coughs) an email from Peter where he's like, "All right, here's your offer." Um, so there's always this kind of like funny joke at Founders Fund that like a horrible, horrible interview experience with me, and then that obviously meant that I ended up working at Founders Fund (laughs) .

   4. HSHarry Stebbings11:33

      Did you instantly like it? It's a weird job, and it's very unstructured. Did you like it straight off, or did it take time to assimilate?

   5. TSTrae Stephens11:42

      It took, it took time. You know, Bryan Singerman gave me the best advice I got in my first month, uh, at Founders Fund when he said, "The only thing that you should be doing for the next year is meeting with every single company you can. Have no standards. Just like take meetings. And eventually you'll start perceiving like what's good, what's not good, like where you can kind of do a founder check to make sure that, um, this is someone that the team would be able to get really excited about." And you can only do that with volume.... like, there's no way that you could say, "I'm gonna be super discerning. I'm only going to take, like, top-tier meetings." It's like, just do as many as you can. So my first year, I think I did, like, just over 500 pitch meetings. Which for anyone that has done VC, I think you know that that is an absurd amount of pitch meetings in a year. Um, and, uh, by the end of the year, I, I think I was, like, pretty well tuned to, you know, what it means to be a top-tier founder, what it means to have, like, great alignment with a, with a business. Um, and, uh, I, I think it does take about that long. It takes about 500 pitch meetings before you really know what you're doing.

   6. HSHarry Stebbings12:53

      Do you agree that it takes $20 million to learn to be an investor? I remember, uh, Jeff at Insight told me that. And I look back at some of my early deals and I'm like, "Oh, God, I would not-"

   7. TSTrae Stephens13:03

      (laughs)

   8. HSHarry Stebbings13:03

      ... "have done those again." Uh, and if you're listening to this, I-

   9. TSTrae Stephens13:05

      20 million sounds low. I mean, if, if you only lose $20 million dollars figuring out how to do this, then that's, that's pretty good. Um, I mean-

   10. HSHarry Stebbings13:14

       Uh, if you receive as ten $2 million checks, it's still ten fuck-ups, right? (laughs)

   11. TSTrae Stephens13:18

       Totally, yeah. No, I, I do think it takes a lot of that. There's all sorts of things that I think the human brain is super interesting. Like, we have the ability convince ourselves of all of these things that are just not true. Like, we look at something and we say, "This category is way too competitive. Um, the founder isn't, like, perfectly aligned. Um, there's, like, this weird economic incentive structure, but this, ah, this is the exception to all of the heuristics I've learned in my time." And we do this stuff all the time. Like, it, you know, it's a constant battle to, like, r- remind yourself of all the reasons why these things don't work. Part of that is just maturity and getting to the point where you feel accountable, like, truly accountable for not allowing yourself to be sucked into these cognitive biases.

   12. HSHarry Stebbings14:02

       Do you know what is a Trey type of deal? And so when I say, like, what I mean, like, what is a straight down the fairway deal for you? For me, it's, like, a non-competitive industry. I never wanna compete against fucking Sam Altman doing foundation models and Dario from Anthropic and Sasha at Microsoft. I want, like, legacy architecture. I want, like, high pricing power. I want really, really large old industries. That's a straight down the fairway deal for Harry, okay? Do you know what is a Trey type of deal?

   13. TSTrae Stephens14:31

       Yeah, I, I really want a big category defining opportunity in industries that haven't been touched by modern technology in decades. Um, and I want a founder that understands how to play inside baseball in that sector. And so, like, two great examples, um, you know, the first big check that I wrote at Founders Fund was Flexport and no one was thinking about supply chain logistics in 2014. Uh, Ryan shows up and he's kind of this, like, kooky guy that lived in China and, like, made a bunch of money on arbitrage, im- pr- like, pricing or arbitrage and bath fittings and four, like, four-wheelers, uh, shipping them from China to the United States. Um, and he was kind of this crazy outlier that it was like, he was either crazy or on drugs or, like, going to be one of the greatest founders of all time. And I, I think that, like, as an industry was super interesting to me. And then the second example of this is Anduril where, you know, basically gonna be super hard, it'll be really capital-intensive, uh, but if you can actually be a next generation rebooted version of Lockheed Martin or Northrup Grumman, that company could be worth hundreds of billions of dollars. Um, and so I, I think that's the sort of stuff that I'm looking for.

   14. HSHarry Stebbings15:50

       Okay, I totally get that. But also, it's not often a consensus deal. When you look at both of those deals, they're both anomalous in a lot of ways, um, for a traditional venture firm thinking. You guys push back on two really interesting notions in venture. A traditional motion of, like, weekly ICs and partnership decision-making and the benefits of it. Listen, I speak to LPs the whole time. This, they love to hear. They love to hear that. You guys (laughs) don't do that. How do you make decisions and why do you encourage every investor to run their own book?

   15. TSTrae Stephens16:26

       This is absolutely true of Founders Fund. We, uh, we all run our own strategy. We don't have Monday partner meetings. Um, everything is super difficult to get through the investment team. And this is on purpose. The, the rough thesis is that the more process you have, the easier that it is to game the process to get to some mediocre outcome. And I'll give you an example. If, like, the most junior person on your team meets, meets with a company and they're like, "Yeah, this company's pretty good. Like, I like the founder. I kinda like the idea. Um, I'm gonna have them talk to, you know, a principal or a partner." And then that meeting happens and they're like, "It's interesting. I don't have, like, super high conviction, but, like, we'll bring it up into the partner meeting on Monday." And then, uh, the part- the, you know, the GP or whatever is like, "Yeah, you know, let's, let, let's do a meeting with him." By the time that it gets to that point, it's like, "Okay, maybe we don't have conviction to write a big lead check, but, like, maybe we put something in because, like, it, it made it all the way through the process. So, like, m- you know, this is probably worth a participation check." Our approach to this is like, it's, it's gonna be really hard to get anything through because there's no structure set up to get it through. It's just, like, personal willpower to go and convince people, um, and get them to take the meetings out- outside of this process cycle. And in order to get anything through, you literally have to just be p- pounding the table. Like, it is on you to have the level of conviction that's required to get people on board.

4. 17:53 – 23:27

   Collaboration & Decision-Making in Competitive Deals

   1. TSTrae Stephens17:53

   2. HSHarry Stebbings17:53

      How do you feel about asymmetric information there? So in this circumstance, say me and you are partners and you say, "Harry, Flexport, Ryan's fucking amazing. All of these reasons why we should do the deal." "Yeah, yeah, Trey, I get it, but I don't know shit about Flexport. I don't know shit about the business." There isn't an alignment of knowledge on a deal and so you miss benefits of partnerships, no? How do you think about that?

   3. TSTrae Stephens18:15

      Naturally, we're gonna pull in the person that we feel like knows the most about the industry.... in the process to have those conversations. You know, I'm not gonna invest in like a rocket launch company without talking to Deleon and Scott. We're always going to pull in the other people that are necessary to get to the best decision possible. It's just not done in a process-oriented way, and we really just wanna back people in their conviction. So when I wanted to make the Flexport investment, I had to kind of go through the gauntlet and answer a bunch of questions from the team and pound the table. But at the end of the day, they were like, "We made a bet on Trey. Trey has high conviction in this, and if he wants to put his, you know, his reputation and his career on the line to go and write a big check into this company, we need to support him to do that." Um, and so, you know, that's, (laughs) that's like kind of on you to, to figure out whether or not you have that level of conviction.

   4. HSHarry Stebbings19:06

      How do you think about winning deals? Say, you have a really competitive deal. Say, Flexport suddenly gets 10 term sheets and some of the best firms in the world alongside you are c- competing for it. Do you come together as a partnership to win it then? Do you still do the isolated partner strategy? How do you think about whether or not to come together to win?

   5. TSTrae Stephens19:23

      The answer is yes, of course, we'll like work together as a partnership to win deals. Um, you know, our, uh, our platform is very strong, and so I wouldn't say that we're often in situations where people are, you know, not keen to take our term sheet over someone else's, uh, which is, which is a great advantage, and it's a great advantage of having a longstanding brand and very opinionated partnership.

   6. HSHarry Stebbings19:44

      Trey, have you ever lost a deal?

   7. TSTrae Stephens19:46

      Yeah, I mean, there, there's at least one that I can think of that I lost on a massive price disparity, but not, not on a, like, fund decision-making. (laughs)

   8. HSHarry Stebbings19:55

      Did that deal end up being a mistake for you to not pay up that price?

   9. TSTrae Stephens20:00

      No, it didn't, actually. I think, like we were wise to hold the line on that pr- on the price in that specific case. That might not always be the case. There might be examples where it would've been better to pay the price, but I don't, I don't think that's generally true. And this is going back to that earlier pro- point I was making about heuristics, is that you can't constantly convince yourself that every exception is actually an exception. Usually, it's just wrong. Usually, you should just follow your instincts around the heuristic.

   10. HSHarry Stebbings20:28

       How do you think about your own relationship to price? Because I find that often we can lean on price as a crutch. How do you think about when you're willing to pay up versus when you're not?

   11. TSTrae Stephens20:38

       There's something deeply troubling about prices getting out of control that have nothing to do with the price itself. So usually, what an inflated price means is that the deal is being com- is being competed, and so the founder believes that they have leverage. The worst deals are the most competitive deals because they're the ones that, uh, are super consensus. Everyone agrees on the thesis. Everyone agrees on the founding team. There's no edge on the investment. Uh, everything is going to be expensive at every round, so, you know, your, your expected value is going to, uh, is going to decrease. Um, and it usually indicates that there's some memetic contagion that's happening in the marketplace. And this, for example, is why Founders Fund was, uh, why Peter put us in San Francisco when everyone else was on Sand Hill, because he wanted us to avoid getting caught up in this like, "Are they going and meeting all the way down the street with all the other people?" It- it- it's because memetic contagion leads to bad investment decisions. And so when a founder says, "I'm going to let this run like auction style," they're actually saying, like secretly inside their head, subconsciously or consciously, um, "I'm basically a, you know, an at- I'm like an athlete model. All I care about is co- competition, and I'm just gonna let it run, and I'm gonna take the best price at the lowest, uh, dilution that I can accomplish, and I, I don't care if that, if that impacts the long-term responsible growth of my business."

   12. HSHarry Stebbings22:07

       Dude, I so love doing this show 'cause I learn from it still after nine years. But I have so many founders that say to us and to every investor, especially in Europe, "Hey, like super appreciate the interest, even a term sheet. I do wanna run a fair process, and I'm actually gonna make a decision next Friday when we've actually run the process, and so that's how we're doing it." How would you respond to that, and do you engage in situations where there's a process?

   13. TSTrae Stephens22:36

       I actually think that's super responsible. Um, I think communicating expectations and aligning people, um, is, is really important. The thing that I actually like a lot less is the false sense of scarcity and urgency, and that was like what was happening in 2021 where the founder was saying like, "You have 24 hours. I have a, I have a exploding term sheet. I'm gonna pull the trigger on this." That is basically saying, "I'm using the leverage that I have, perceived or, or real, um, to push people to do things with limited information." Um, and those sorts of behaviors are like, they're manipulative, um, and they usually lead to bad outcomes. And so I think someone saying, "I'm gonna give this a week, this is when I'm like hoping to move through the wickets, and if they really want Founders Fund involved, like they're going to be respectful to us kind of wo- walking through those wickets alongside

5. 23:27 – 31:45

   Lessons from the Crazy Times

   1. TSTrae Stephens23:27

      them."

   2. HSHarry Stebbings23:27

      Can I ask you, we mentioned some of the crazy times the last years before. What would you say are your biggest takeaways from the crazy times, and did you change your style in any way because of them?

   3. TSTrae Stephens23:36

      I think that the primary lesson for me is that I really don't have fun in that environment. It was, it was super stressful, and I think for some people, it was like the deal velocity was super energizing. For me, it was awful and draining. Like I was, I was on the verge of just leaving venture capital, um, because this idea that, you know, a founder goes out and basically holds their capital source hostage, um, by creating this like su- this hyper-competitive, overpriced environment was just gross. Like it just didn't feel right. And I say that as a founder as well, like we ran a process at Anduril during that time, and we didn't do that because we agreed this is really gross. We're not just going to let the highest bidder...... come in and sweep us off our feet. There ha- Like, we have to think about the future of our business. And I think now, in 2024, looking back on what happened, it's very easy in retrospect to say, "Wow, we really let that get out of hand and now there, we have got- we have to do a recap, we have to do a down round, we have to do all this crazy structure." But we're doing the same stupid stuff all over again. And I don't th- It's like people don't realize, like, guys, you have to calm down. Think about the future of your business. Don't think about what makes you feel good when people are, you know, patting you on the back and giving you exploding term sheets and taking you out to steak dinners. Like, this is not good for your company. It might be good for your ego, but it's not good for the company, and that's what we should be maximizing, is the long-term value and sustainability of these businesses.

   4. HSHarry Stebbings25:06

      This was my point with some of the crazy, crazy rounds that we're seeing now, especially in AI. Do you think we actually did learn our lesson?

   5. TSTrae Stephens25:14

      I don't think we did. (laughs)

   6. HSHarry Stebbings25:15

      (laughs)

   7. TSTrae Stephens25:15

      I think there are, there are some people in the industry, uh, that I have a tremendous amount of respect for that have looked at this and said, "We're just not gonna play this game." Like, it wa- Guys, it was literally, like, two years ago. Li- This isn't, like, a ten-year information gap. It was, like, two years ago. And then there are other people that are saying, like, you know, "YOLO. I, uh, like, I have to win, I have to get in, um, and I'm gonna plow it in." You know, there was this, this incredible scene in Silicon Valley, that I've been sending some people this video, where, uh, the main character is, uh, sitting at the bar with another founder and the guy is like, you know, his company was taking awa- taken away from him. He's n- no longer the fou- He was no, he's no longer the CEO. And, uh, he says, "You know, you could have just, like, taken less at a lower price." And he was like, "No, no, no. Like, I was offered this price and this amount." And he was like, "Yeah, but you didn't have to take it. You could have taken less at a lower price." And he's like, "Why didn't anyone tell me I could have taken less at a lower price?" (laughs)

   8. HSHarry Stebbings26:14

      (laughs)

   9. TSTrae Stephens26:14

      And, uh, I feel like sometimes founders are just, they just get caught up in the moment. They get caught up in this idea that, like, the only thing that matters is up into the right and minimizing dilution. And, like, I don't know, we'll see what happens. We'll see if the, if, like, that lesson persists.

   10. HSHarry Stebbings26:31

       I get in trouble for this when I say this, but I feel this when I see like 2 on 20 YC rounds. And I'm like, with 2 on 20, you're automatically excluding any top venture firm. Because really, the 1.6 is gonna be available for a lead, which is what? 7.8%? You're not gonna do something for 7.8%, it's not worth your time. And so, i- instantly it excludes them. So, I, I totally agree with you and I'm with you. (laughs) I have to ask a bit of a weird one. Doug Leone said on the show that venture capital has moved from a high margin boutique business to a low margin commoditized industry. Do you agree with him, and will we see venture returns degrade as a result?

   11. TSTrae Stephens27:11

       I definitely think there's truth to that, that statement. I think, you know, the industry has certainly become significantly more competitive and commoditized. At the same time, like, you know, the returns end up being pretty highly concentrated towards the winners. Um, you don't see, like, really high IRRs across every new fund that pops up. Um, and so, I think there's definitely still great potential for the asset class, uh, as, as an asset class. Um, but certainly, like, as, you know, Peter points out in his book, Zero to One, competition is for losers and it will always be for losers. And I don't care if it's venture capital or startups or any- It's... Competition is for losers. And so, we need to figure out ways to differentiate and stand out.

   12. HSHarry Stebbings27:57

       What do you think is your biggest challenge today as Founders Fund? I remember, um, when I had Keith on the show, Keith said about just finding the next generation of great talent and it being a young person's game, which I thought was an interesting answer. What do you think is your greatest challenge as Founders Fund today?

   13. TSTrae Stephens28:15

       Deal flow is always the biggest thing for venture capital. It's like, you have to have access to the, the deals that are going to move the needle. And for large funds, th- By the way, this is very different than people that are operating seed funds or whatever, but for large funds, the economics only really work if you have a 10 plus billion dollar winner in every fund. Um, or more than one, in, in most cases. I think, like, you, you have to evaluate yourself on whether or not you got hits on those, those kind of, like, monopoly style winners. Um, and that's just about maintaining access to the network, um, and being super easy to work with. And I think Founders Fund has the latter in spades. Like, you know, we, we were the first fund that was talking about being founder-friendly, um, and have, you know, we don't generally wanna take board seats. We are incredibly hands-off and operationally, uh, helpful when asked, but only reactively. Um, and, uh, I think the, the former is the harder part, though. It's like, you have to make sure that you are seeing all of these companies. Um, and, uh, and that has to be the focus for the entire investment team.

   14. HSHarry Stebbings29:25

       Do you think the best founders need their VCs?

   15. TSTrae Stephens29:28

       You can definitely get good advice from people throughout the industry, whether it's other founders or VCs, and a great founder will seek wisdom from people they trust that have experience that's relevant to what they're doing. Do I think that doing that in the structure of, like, gather a bunch of investors on your board is the way to do it? No. I think that's really stupid. Any company i- that's successful is not successful because their VCs are really smart. That's not how this industry works. The VC is not gonna do the, uh, the hard work that's involved with building a company. The best companies are going to be the best companies because the founder and the team that they've built around them is awesome and has a plan and a vision for the future, and the v- best the VC can do is ride along and not be annoying.... and not create drag for the company. Um, and maybe on occasion they can provide some advice or introductions that are helpful, but that will not be the reason the company works.

   16. HSHarry Stebbings30:27

       You know, venture is today kind of put in two worlds. You've got like the boutiques who have specialisms, and you've got the kind of capital accumulators, Andreessen and Sequoia and Coatue and NEA. Where is Founders Fund? 'Cause you guys l- like reduced your fund size. The fund sizes themselves I don't believe were actually that big. I mean, they're, they're like, I think it's about a billion dollars each, which is big, but it's by no means the large, large funds that we see at other funds. Where do you sit in, capital accumulator or boutique?

   17. TSTrae Stephens30:58

       It's a good question. I, I think probably somewhere in the middle. Um, you know, we have, we have a lot of money under management. Uh, so we're not like a, a small fund by any stretch. Um, but we also are very intentional about playing our, our core venture strategy. And so we're not trying to be cute with weird structures and debt instruments and like big category-specific funds, nothing like that. Our core vision is we just wanna invest in the best founders building the best companies that are going to be categ- category defining. And I think you can do that through a very traditional venture model of, can we get a check into the Series A and can we follow on to the ones that are working? Uh, and that's what we do, and I think that's what we're always

6. 31:45 – 38:18

   Lessons on Reserves & Downside Protection

   1. TSTrae Stephens31:45

      going to do.

   2. HSHarry Stebbings31:45

      So Trey, you mentioned the follow on there. I have to ask this. I think reserves are a delusion. I think it is too difficult in ma- majority of cases to know which company is truly a value generator and which just has momentum, which is different to true sustainable value generation. What have been your biggest lessons on reserves and how do you think about that when I hi- when I say that?

   3. TSTrae Stephens32:06

      Well, I do think it's important to hold reserves f- to double down in places where you see fund returning potential. I don't believe that doing that in a way that's like guaranteeing your portfolio companies, that you have like reserve checks that are going to back into them, I don't think that model makes sense because... And, and this is, by the way, the biggest risk of taking seed money from an institutional fund, is that like doing your parata is super lazy, doing more than your parata is actually a signal in if you're not going to have real signal, if you don't have high conviction, you probably shouldn't be doing anything at all, because the parata, again, is just super lazy. Um, and so I think this strategy really should be make your bets and then where the conviction is justified, you should be doubling, tripling, quadrupling down. Um, and so you do need to have fund access to do that so that you're not striping across a bunch of different funds. Um, but, but I don't think doing that in a really like structural procedural way is, is smart either.

   4. HSHarry Stebbings33:04

      Do you think about downside protection when investing? You guys also invest large checks. Do you think about downside protection given the size of checks you write, or is it all upside maximization, in the words of Bryan?

   5. TSTrae Stephens33:15

      All upside is maximization. No, dow- downside protection's silly. Like, I, I think if you go back and you look at our portfolio, like whether or not we got m- our money back has never impacted fund performance. (laughs) Like the only thing that moves the needle for a venture fund of our size is $10 plus billion category defining winners. That's it. Everything else is just a rounding error to zero.

   6. HSHarry Stebbings33:36

      What's been your biggest loss and what did you learn?

   7. TSTrae Stephens33:39

      Well, I've only been in the industry for 10 years. And so the reality is, is that startups survive for longer than anyone thinks they will. And so there are certainly investments that I've made that are still, you know, puttering along, um, and haven't figured out a way to hit the, the inflection, but I wouldn't call them a loss. Um, I think, I think the, the biggest thing, the biggest lesson that I've learned from these is that there are times where I've gone in and I've said, "This has 10X potential from where it is right now, and therefore it's probably worth making a bet." And I look back on some of those investments that I've made and I've said, "Even if it 10X'd from, uh, you know, a small Series A, it's not gonna return the fund. It's not gonna really move the needle. And really I should be focusing on finding massive upside because the opportunity costs of deploying these checks, uh, is, is actually quite high."

   8. HSHarry Stebbings34:33

      Okay. But do you not think you will always underestimate the size of your true winners? Uh, you know, I, if you look at all of Bessemer's memos, Shopify I think they put at a $2 billion company, Snap, uh, was thought to be a $500 million company, Procore, a $300 million company. These are across different firms. I'm not just chastising Bessemer.

   9. TSTrae Stephens34:53

      Yeah, yeah.

   10. HSHarry Stebbings34:53

       Um, but you always underestimate the size of your winners. You know, Peter and Facebook is a core example. No one would have expected Facebook to be what it is.

   11. TSTrae Stephens35:02

       I think the example that you just offered is exactly what differen- differentiates Founders Fund. Having, like pushing your team to do things like deal memos, for example, forces them to like put down a number that they're later going to be judged by. So the investment team is gonna go back and they're gonna look at that investment memo and they're going to say, "Wow, you outperformed expectation on this deal. Isn't that great?" And if you, if you don't hit it, you know, you're gonna, you're gonna be held accountable for missing. And so of course everyone is going to underestimate because they wanna lower the bar that's required for them getting credit for some big outcome. At Founders Fund, we won't do the investment if we don't believe it can return the fund. And so we absolutely have to have crazy amounts of conviction to make these bets. And I think that is like core to our culture. If you look at any of the big outcomes across our portfolio, whether it's, uh, you know, Spotify, Stripe, Airbnb, Palantir, SpaceX, Anduril, um, Stemcentrx, so if you look at all of these big outcomes for us, every single one of them, there was someone on the team banging the table saying, "This is a $100 billion company."

   12. HSHarry Stebbings36:07

       So when you have to have this level of upside, do you not put market first above founder? Because if a founder is in e-commerce, an example, honestly, the chances of it being a $100 billion company are as-... it is just so freaking hard to create a hundred, you know, if they're the next Patagonia, as an example. Really? So my question is, do you prioritize markets over founders given the importance of upside maximization and true upside only being available in very, very few markets?

   13. TSTrae Stephens36:42

       No. Because I think the- the best founders are going to pick really strong markets, and they will increase the probability of success even in, like, a- a middling market. Um, so I- I think the founder has to be the atomic element, always. But obviously, like, there are going to be great founders that do, you know, kind of middling things. Um, you know, I talk about... I wrote an essay called Choosing Good Quests, that, uh, you can read online, with Markie Wagner, who's actually one of our portfolio founders as well. Um, and I think this is, like, endemic actually in Silicon Valley, where you have all these really talented people that have the potential to go and do something that's, like, world-changing, and instead, they do something that's easy that they know they're gonna make money from. It's like, you know, George Clooney sells tequila on the back of his brand. Good for George Clooney. It's a commodity. There's nothing special about his tequila. It's the same thing with enterprise SaaS. If you're, like, a multi-time successful entrepreneur and you're starting, like, fairly simple, trivial enterprise SaaS company, like, shame on you. Shame on you. Like, you- you need to go big. Like, have some vision for- for how you can impact humanity.

   14. HSHarry Stebbings37:50

       (laughs) Don't just ruin my investment thesis, okay?

   15. TSTrae Stephens37:55

       (laughs)

   16. HSHarry Stebbings37:55

       I like boring enterprise SaaS companies. You come with your fucking defense and space companies-

   17. TSTrae Stephens38:01

       (laughs)

   18. HSHarry Stebbings38:01

       ... and you tell me that B2B payroll is bad. Damn. Uh, it's-

   19. TSTrae Stephens38:06

       There- there are some, there are some great enterprise SaaS companies. Uh, and I think there are some great founding stories behind enterprise SaaS companies as well. I just think that as- as a category, there are a lot of them that are pretty uninspired.

   20. HSHarry Stebbings38:17

       Will

7. 38:18 – 42:29

   Backing Founders Despite Disliking Their Ideas

   1. HSHarry Stebbings38:18

      you back a founder when you hate their idea? You love them, but you hate their idea.

   2. TSTrae Stephens38:25

      Yeah, I think, uh, I think there- there are plenty of situations in which I've done exactly that, or I've at least been tempted to do that. Um, because again, the founder is the atomic element. A really great founder and team are going to be able to pivot their way into strong product market fit, um, whereas a great idea with a- a weaker founding team, um, are- are going to get stuck, um, and will likely spin out. So, I think you have to start with that founder aspect first.

   3. HSHarry Stebbings38:53

      Can you tell me about a time when you thought a founder was great, they turned out not to be? And obviously not name the founder. That'd be incredibly harsh. Uh, I don't re- recommend that. But, like, what did you not see that you wish you'd seen? I backed this incredible data scientist out of this amazing company, and everything technically was great, but they were an operator, not a founder. And the speed was slow, the creativity was low, and they were an amazing operator, but actually, they were not a founder, and I misjudged and I overestimated their founding ability because their technical ability was so strong. Big mistake.

   4. TSTrae Stephens39:31

      Yeah. Yeah, I think these, tho- those sorts of examples are probably the most common, where there's, like... Like, I would say the most common example is where you have a founder that doesn't build a, like a s- a diverse enough set of skills around them with the rest of their founding team or their executive team, and they assume that their, you know, specific superpower will be enough to make it work. Because there are a lot of brilliant people, some of them are, like, scientists, some of them are, you know, software engineers, some of them are business people. Um, you know, you could have, like, a- a sales founder that could be revolutionary and could change an industry. Um, but they need to have a complete team. And so, I think sometimes I've gotten really excited about a- a single person, and then it turns out that there isn't a completeness of team. Maybe that person does not have a- a particular strength in, um, recruiting, and that becomes super problematic for the business. So, I think, like, you wanna see the depth in bench, um, with- with even the best founders.

   5. HSHarry Stebbings40:30

      You're like, "Harry, none of this is on schedule," and I'm like, "I know, I told you beforehand." But how quickly do you know if a company is good or not? I think you know in the first month.

   6. TSTrae Stephens40:41

      Wow, that's really fast. I don't know if I would say the first month, but definitely in the first six months, um, I think you can get a sense for momentum. There's almost nothing as important as momentum in startups. Like, you know, there- there's this, I think, idea, especially in deep tech, that, like, if you just hold out long enough, like, eventually they'll cross enough tech milestones that, like, things will seem like they're, you know, starting to move. And even in deep tech, momentum turns out to be the most important thing. Um, and you can see that, you can feel it. It's visceral. And I think that it's definitely not five to 10 years like people often talk about as- as venture capital windows. And if you go back and you look at the best companies in any portfolio, they were kind of the best companies at every stage. Like, they were incredibly awesome at A, they were incredibly awesome at B, they were incredibly awesome at C. Very rarely do you see a company that, like, struggled for a long time and then, like, suddenly hit an unlock. That doesn't really happen that often.

   7. HSHarry Stebbings41:38

      Do you think so? Like, I could push back on that one. Like, Figma, for sure, like, was not hot in the early rounds, took a long freaking time for anything to come out. Your HubSpots of the world were not really very hot, took a long time for much to come out. Uh, Viva on the vertical SaaS space, I mean, just definitely not hot, but unbelievable 35 billion dollar business. I'm almost like, there's always a trough of disillusionment that a company goes through, even in the funding markets, where it's like, "Ugh, this is, this is the earth round."

   8. TSTrae Stephens42:10

      I think those examples are less common than the ones where the momentum drove them all the way through. (laughs) I don't disagree with those-

   9. HSHarry Stebbings42:16

      (laughs)

   10. TSTrae Stephens42:16

       ... specific examples. I just think you're cherry picking very specific examples that are the exception, not the rule.

   11. HSHarry Stebbings42:22

       Listen, I'm smart with my usage of data, okay? So just give me some credit.

   12. TSTrae Stephens42:26

       (laughs)

   13. HSHarry Stebbings42:26

       (laughs) Uh,

8. 42:29 – 47:12

   Role of Market Timing in Investing

   1. HSHarry Stebbings42:29

      my question to you is, you mentioned there about kind of timing of- of deep tech startups in particular. I'm always just, like, very focused on market timing. I never, like, take market timing risk. You clearly do.... which I love. I mean, that's some real kahunas. How do you think about market timing risk as an investor today and as a founder? I mean, both.

   2. TSTrae Stephens42:49

      You know, I-I think that it's not on me as a venture capitalist to evaluate markets and then pick companies to time some arbitrary thesis I have for any particular market. You know, that's asking too much. Like VCs are not g- generally, like, super talented specialists in any one space. Like, the best VCs are kind of generalists, um, and that means that they might have, like, a shallow understanding of a wide set of things, uh, but they probably don't have, like, some massive kind of polymath depth of understanding of every type of company they're going to look at. And so, I think it's really on the founders to communicate why the market timing thing is, is relevant to their business, and the best founders are able to do that in a way that's super compelling. Um, and so again, I think this comes down to, like, do you have conviction?

   3. HSHarry Stebbings43:38

      Oh, thank God I don't have to do it, then. Uh, Chris Dixon actually said on the show yesterday to me, "I, uh, I like to predict the future, uh, and then kind of find companies that align to that prediction." Would you very much disagree with that in terms of a style? Let's not disagree, but you have a very different style, I take it.

   4. TSTrae Stephens43:57

      Yeah, I- I- I think as, as a founder, I think, yeah. Like, Anduril, in my- i- in some way was me predicting where I thought the defense market was going to go. Um, and so as a founder, I- I think that is what their job is. As a VC, I think, like, your investment thesis is only as good as the strength of the companies that come and pitch to you. (laughs) And so, did I have, like, some super crazy interest in supply chain and logistics bef- or a thesis in supply chain and logistics before I invested in Flexport? No, of course not. Like, I needed Ryan-

   5. HSHarry Stebbings44:28

      Wow.

   6. TSTrae Stephens44:28

      ... to, like, convince me of the- the timing to the market. And so, I think that, like, anytime you're- you're looking at a thesis about the future, you are saying, "There is a category, and I have, uh, like, some belief in that category," and that means you're probably too late. Like, if you're- if you're like, "I have a thesis on SpaceX- Space Tech," but you're not a SpaceX investor, you're probably losing money. If you're like, "I have a thesis in crypto," but you're not in Bitcoin and Coinbase, you're probably losing money. If you have a thesis in, uh, cyber, but you're not in Palo Alto Networks or CrowdStrike, you're probably losing money. It turns out that the core monopoly investment that won is the only one that mattered, and the rest of the category matters a lot less. So if you have some vision for what the future looks like and you're looking for a company to invest in that's doing it rather than starting it yourself, you're probably already too late.

   7. HSHarry Stebbings45:19

      So first, despite a decade in this business, clearly you haven't learnt the core lesson, Trey, which is post making an investment that goes well, you absolutely did have the thesis that it would play out in this way.

   8. TSTrae Stephens45:32

      (laughs)

   9. HSHarry Stebbings45:32

      And actually, it was all your prediction. You actually really co-founded the company despite the fact you only put 50K in at the Series D. Uh, my que- (laughs) that's my favorite when you see those ones. You mentioned there about kind of the- the- the core taking so much of the value, and I agree with you. You look at your Andurils of the world, you look at your OpenAIs of the world. So is your perspective as an investor and as a founder then, fuck it, don't try and do defense tech, just do Anduril? And instead of trying to do AI, fuck it, just do OpenAI? Is that generally the right strategic play, do you think, for investors?

   10. TSTrae Stephens46:11

       I mean, there will be other companies that might be worth taking a bet on, for sure. Like, you know, if you were a social media investor, you missed Facebook, but you had got conviction and invested in Snap, you actually did pretty well on the back of that investment. So there- there are exceptions. There are places where you should stay open to the idea that there's a brilliant founder and a team that has the ability to go and- to make something in- in a market. But I think that this idea that investing broadly across an entire category, where you're doing relative rather than absolute assessments, is just bad strategy. It doesn't make any sense. Like, there's not gonna be 100 SpaceXs. There's probably not going to be two SpaceXs, but if there are, that's just- you should just be making that one investment in, like, a really high conviction thing that you would have done regardless of whether or not you were looking at that category. And so, yes, that might be a vi- violation of the rule of look at me, I'm so smart. I don't think I'm so smart. I think, like, the founders are the ones that are really smart that are changing the world, and I'm just lucky to be on the ride with them.

9. 47:12 – 1:08:51

   Need for Software-Defined National Security

   1. TSTrae Stephens47:12

   2. HSHarry Stebbings47:12

      Uh, as an investor, yes, I agree with you. But as a founder, you're on the flip side of that. And so I do just want to flip to that, because you said you have to paint a compelling case for why now, and why it is more exciting now today than it was in prior years. What was your insight development, the way that you saw the world differently to others with Anduril, that you really had from day one that made you want to commit so much of your life to it?

   3. TSTrae Stephens47:35

      I- I mean, I had spent my entire career in national security. I- I worked in the intelligence community after college, um, and then I was at Palantir really early on supporting intelligence and defense, uh, pro- programs. So this was a space that I've always been really passionate about, and I learned a ton of lessons from that 10-year run prior to- to joining Founders Fund. I started going out and meeting with as many companies as I could find that were bidding on federal contracts and also raising venture dollars, and I was shocked at how little there was going on in leveraging, like, cutting edge technologies, particularly in software, um, to impact, like, critical national security requirements and gaps in our capabilities. And, um, I- I kind of looked at that space and said, "This is not gonna be good if we shift out of counterinsurgency and counterterrorism into great power conflict. And if we're going to compete in great power conflict, we need to, like, actually bring a software-defined mentality to our national security apparatus." And-

   4. HSHarry Stebbings48:37

      Pause, pause, what's great power conflict, just so we're aware? This is like global war instead of just traditional counterterrorism, correct?

   5. TSTrae Stephens48:44

      No, it's specifically, like, we're no longer competing with, like, rogue agents and non-state actors. Like, our com- competition are huge nation states with, you know, a lot of...... power resting behind them, places like China, uh, you know, Iran, Russia. Um, and we had for a, you know, over a decade, really like a decade and a half, we have just been entirely focused on counterinsurgency. Uh, and you're quit- The problems that you're dealing with, with things like, uh, airspace superiority in Iraq or Afghanistan, totally different than determining airspace superiority in Ukraine (laughs) or in, you know, a potential Taiwan conflict. And so, we really needed to like shift to a mentality of how do we compete with great powers, uh, and how has that changed since the last time we did this during the Cold War? And the answer is, significantly. Like the capabilities, the huge expensive platforms that we built for competing with the Soviet Union are not particularly relevant in a future conflict with, you know, a China or an Iran.

   6. HSHarry Stebbings49:49

      (laughs) I'm- I'm sorry, uh, j- in terms of like how they're so different, how are they so different? What were we woefully inequipped with?

   7. TSTrae Stephens49:57

      Yeah, so like when we were preparing for a fight against the Soviet Union, we were building nuclear submarines, aircraft carriers, um, advanced fighter jets, with the idea that we're competing with MiG-29s in an airspace. And so, if you have to build like a counter air system and you're shooting a two and a quarter million dollar missile at a tens of millions of dollar MiG-29, fine. Like that's- that's a co- that's a trade-off you're willing to make. But in modern conflict, we're talking about swarms of drones, kamikaze drones, low cost, um, remote- r- remote controlled systems. You're talking about autonomy. And so can we afford to shoot a $2 million Patriot missile at a $150,000 cruise missile or kamikaze drone? No. It doesn't make sense anymore. Now the whole thing is just m- messed up. And so, when you're not fighting MiG-29s, you have to make decisions about how you're going to do airspace s- superiority. And this translates to every domain. It's like we have to make the same de- decisions with undersea, with surface vessels, with ground vehicles, with airspace, with space.

   8. HSHarry Stebbings50:58

      Okay, I- I get you totally. What worries me is two things. One is customer education. When you're selling to governments in a lot of cases, the level bluntly of intelligence around the latest use of AI, uh, or the latest use of LLMs, or the latest use of any of the things that we talk about quite brazenly in tech is so low. How do you approach a customer education when it's a really challenging start?

   9. TSTrae Stephens51:26

      I think this is core to doing work in this particular sector. Um, and it's not the field of dreams. You know, like if I build a really cool product or capability, it's not like the government's just gonna show up and be like, "Yeah, I'm a buyer of whatever it is that you're building that you think is solving a problem." You have to have a, uh, like a whol- a holistic view of government relations, lobbying, uh, telling, being really good at telling a narrative, communicating to agency heads, decision makers, and your potential users in the field. And I think that this is like the type of company that's really, really hard to build, you know, for a- a handful of teenagers in a garage. It's not like a- a software company that has like the same k- type of breakout story as Facebook. And I don't think it's like random chance that Palantir, SpaceX, and Anduril were all founded by billionaires. It turns out that it's re- it's that hard to do this. Um, and so you have to approach it with that in mind.

   10. HSHarry Stebbings52:20

       Well, is it the billionaire element that makes them successful or is it the structure of their teams and the knowledge and skillsets of their teams? 'Cause brilliant people can raise billions of dollars. It's not the billions, it's the team composition of Palmer, of you that make it special, no?

   11. TSTrae Stephens52:35

       Kind of, I- I do think that like the- there is a capital advantage to having a billionaire as a co-founder. Um, at Palantir and SpaceX certainly, it took a really, really long time to get momentum on the business side of things. And so you needed to be able to raise money through a drought while you were figuring that out. At Anduril, it's- it's a little different now because you- we have the benefit of standing on the shoulders of giants. Like we have done this before, we saw the way it worked with them, there are hundreds of people who have executed this sales motion successfully. Um, and so it's not quite as hard, but there's still a huge capital advantage to going in and saying, "This is capital intensive, it's gonna be really hard and we wanna raise a war chest to- to finance getting through to program of record wins." And this isn't something that's gonna take six months, it's something that's probably gonna take closer to three years. Um, it- it's like, it is important to have the ability to go out and raise that sort of capital.

   12. HSHarry Stebbings53:30

       Okay. Another qu- like concern that I always have is just like the incentives of buyers. If you think about a lot of the incentives of these kind of bluntly sp- averagely paid middle management government bureaucrats in a lot of international governments, why would I bother buying Anduril? Uh, n- now it's obviously a very well-known brand, but like in the early days when I've got established brands where I'm not gonna get... It's the same old LP argument in venture, just invest in X well-known firm. How do you fix the incentive problem of buying from innovators?

   13. TSTrae Stephens54:02

       As I mentioned before with a different set of problems, I think this is primarily a culture problem. All of the authorities that need to exist to buy products from non-traditional, um, companies, they all exist. You can do it. If the government wanted to do it, it could do it. The problem is, is that they don't because they don't feel, uh, they don't feel as comfortable with it, they claim that it's a much riskier path. I- I happen to disagree with that particular fact, but I think- I think the, um, the reason why in the early stages people were willing to take a chance on us is that we were working very focused on problems that were clearly software problems. And I think they had had like long running bad experiences with the traditional players in the space coming to them delivering capabilities that relied on-... that, you know, the technology delivering the, against the problem set depended on software execution. And so when we come in and we have a demo and we say, "We can actually do the thing that we know you're trying to do and we can demonstrate that to you in real time, and we've taken the risk of funding the development of those capabilities. We're not asking you to tr- like, believe us and, like, a response to an RFP. We're just gonna show you that we can do it." Um, and that shifting that risk to us rather than putting it on the government was really important to those early wins.

   14. HSHarry Stebbings55:19

       So what, what year was Anduril fo- founded? 2017? 2018?

   15. TSTrae Stephens55:23

       17, yep.

   16. HSHarry Stebbings55:25

       17, okay. So did you just have a crystal ball and predict the explosion of global conflict?

   17. TSTrae Stephens55:31

       (laughs)

   18. HSHarry Stebbings55:31

       Because we could have continued, we could have continued in this period of detente for another 10 years, and the need for Anduril would have been lesser than it is now, for sure. Was it just lucky on timing, dude? That sounds awful, not lucky on timing. (laughs)

   19. TSTrae Stephens55:47

       No, no, uh, li- like I said, I'm not, I'm, I'm gonna do the opposite of what Chris Dixon did and I'm gonna say I, I don't have a crystal ball. I'm not predicting the future. I'm gonna try and I'm, yeah, like, I think all of us, uh, in the, on the founding team of Anduril, like, we perceived that we were going to care a lot more about these things post count- post insurg- counter-insurgency, counter-terrorism. But obviously, like, I would not have guessed that all of these global conflicts would have necessarily happened. Um, but I think, like, the writing has been on the wall for a while that globalization didn't really work and that traditional strategic deterrents with nuclear weapons was not going to be the, the only thing that drove a reduction in conflict globally. And so, um, I, I think there was o- there were some smart decisions that were made, and I think we had a lot of conversations about those, uh, those elements. But I certainly wasn't, like, standing at a white board, you know, with lines and pieces of yarn and pieces of paper being like, "And you see, China is going to invade." (laughs) Like, I, I, I don't think I had that level of insight.

   20. HSHarry Stebbings56:52

       We've got Putin coming down the left, uh, that's 2023-

   21. TSTrae Stephens56:56

       (laughs) Yeah, exactly. I mean-

   22. HSHarry Stebbings56:57

       ... which I, I am 2025. (laughs)

   23. TSTrae Stephens56:59

       To be fair, shortly before Anduril was founded, Putin went, uh, to a university, a technical university in Moscow, and he said, "He who controls artificial intelligence will control the world." And so we weren't the only people that were thinking about this. He had clearly been telegraphing his intention, um, with tech development in Russia since even before Anduril started.

   24. HSHarry Stebbings57:21

       Just gonna lob this one in. Were you not quite impressed with him in Tucker Carlson's interview?

   25. TSTrae Stephens57:26

       (laughs) I mean, I, I think, like, the, the level of historical depth was, was really special. You know, I, my concern was, was less about, like, is Putin impressive? Is he unhinged? Uh, it was more so that like, man, we have really just allowed our Western political system to just be destroyed by mediocrity. And, you know, we have, our standards for our elected leaders are like, bargain basement level. It's really pathetic. And I, I don't know what it's going to take to convince talented people to put themselves in a position where they're running for political office, but I think this is a great risk to human civilization at this point, and, uh, we need to do a better job.

   26. HSHarry Stebbings58:12

       I'm not being rude. Why don't you?

   27. TSTrae Stephens58:16

       (laughs)

   28. HSHarry Stebbings58:16

       So like, it's fine for, uh, no, but it's fine for us VCs and like, and, and startup founders as well, to say like, "God, what a woeful state of politicians." Well, I mean, we're pretty smart people but we choose to be in the private sector, a lot of the time because it's more lucrative, because we see a better life. But if we really thought that it could be improved and you know that you could do a better job, should you not take that on?

   29. TSTrae Stephens58:41

       I mean, I, I am deeply committed to the idea that I will return to civil service at some point in my career. Um, I don't know what, from a timing perspective that will look like, but I am deeply committed to that. Um, as far as elected office goes, my wife, who I love very much, has told me that she will divert- divorce me if I ever run for office. And so, elected office is off the table, um, but civil service is definitely on the table.

   30. HSHarry Stebbings59:05

       So you said, "God, it was that easy? Uh, okay." (laughs) Sold. (laughs)
10. 1:08:51 – 1:15:34

    Quick-Fire Round

    1. TSTrae Stephens1:08:51

    2. HSHarry Stebbings1:08:51

       Trey, I could talk to you all day. I wanna do a quick fire round with you. You have, uh, (laughs) uh, many different hats. Being a father is one of them. You can call yourself up the night before you became a father and give yourself one piece of advice, what would you tell yourself?

    3. TSTrae Stephens1:09:05

       This is going to be the hardest 18-month stretch- stretch of your life, and it is worth it in every way. And just keep your head down and realize that there's light at the end of the tunnel.

    4. HSHarry Stebbings1:09:19

       What have you changed your mind on most in the last 12 months?

    5. TSTrae Stephens1:09:23

       Most of the answers that I could give to that would definitely get me canceled, so I'm not gonna- I'm not gonna say those things. But, um, I think there are limits to human scalability. Like, I went through a long period of my career where I was opportunistically saying yes to a lot of things that benefited me tremendously that I feel really good about, um, that I just don't have the ability to say yes to anymore. And so I think learning how to scale and then using nos strategically, um, ha- has been a big ch- change for me in the last year.

    6. HSHarry Stebbings1:09:50

       Biggest lesson from working with Peter for 10 years investing?

    7. TSTrae Stephens1:09:53

       Oh, man. He is- he's such a unique person. Like, you know, I think, uh, most smart people have the ability to collate information, like we collect information from a lot of places and then we organize it and ship it. He's like- he's source material. Um, and so it's just he's not collating information, he's just generating. Um, and so I could- I could talk for days about all the things that I've learned from him. Um, I think the most- the most critical to this particular moment and what we went through in 2020, 2021 is that hype is not aligned with, uh, with outcomes. In fact, it's often negatively, uh, correlated with outcomes. And so when something feels super consensus, you should be running away, not running toward.

    8. HSHarry Stebbings1:10:35

       It's so funny how kind of the most conventional rules of venture are so true, but no one ever listens. (laughs)

    9. TSTrae Stephens1:10:42

       Totally.

    10. HSHarry Stebbings1:10:42

        Funny. Uh, if you could choose one person as a board member, who would you choose?

    11. TSTrae Stephens1:10:46

        No one. Smart people are accessible whether or not you're on their board- they're on your board. You can take advice from people anytime. Um, the least- the last thing you need is unnecessary governance. No one.

    12. HSHarry Stebbings1:10:58

        Does money make you happy, Trey?

    13. TSTrae Stephens1:11:00

        No. I mean, money- money can, like, get, uh, like, simplify things that are complicated or tedious in life. Um, but you'll never find core meaning from the acquisition of wealth. Everyone that has gone through this process, I think, comes out on the other end and says that there's an- a deep emptiness that they feel, that it doesn't matter how much stuff they pour into it, it'll just never be filled. Um, you have to, like, understand the anthropology of your humanity and come to terms with what for me is a- a religious, spiritual, uh, faith. Um, but for other people, they might try to find that in all sorts of different things, but money is certainly not one that gives you meaning.

    14. HSHarry Stebbings1:11:38

        Has your spiritual faith impacted your investing mindset?

    15. TSTrae Stephens1:11:41

        A lot of people, and this goes, uh, primarily for, like, my upbringing even as well, there were a lot of people that they viewed their job as a way to pay their bills, right? It's like, "I'm gonna go to work nine to five, I'm gonna make money, and then my life will be what I do when I'm not at work." Because the work is just like a mechanism to generate cash to survive. Um, I think this is, like, a deeply un- like, theological way of viewing the world. I think, like, we are- we have a- a responsibility to our vocation. And it doesn't matter what you're doing, whether you're a barista at Starbucks or, you know, starting a defense company, um, you- that is your vocation, and you are living in service to humanity. And so I think as an investor, as a person of faith, I look at- I look at the world and say, "I want- I don't want the world to be a science fiction dystopia." Like, I don't want to live in, you know, all these Hollywood pictures. I want the world to be, uh, approaching the Kingdom of God. Like, I- I think we have a role in- in building that. And so as an investor, when I look at something and I'm like, "Yeah, this is a vice investment maybe. It's probably gonna make a lot of money because it leads to addiction, or loneliness, or, you know, whatever," um, I don't want to be involved in that. I don't want to be involved in stuff that might be a good economic outcome, but is going to lead us closer to a science fiction dystopia.

    16. HSHarry Stebbings1:12:57

        How big could Anduril be?

    17. TSTrae Stephens1:12:59

        I mean, Lockheed Martin does over $65 billion a year in revenue. They have, you know, a two, two and a half X multiple, uh, that's applied to them on the public market. It's worth, you know, $130 billion or whatever. Um, Anduril operates at higher margins, much faster growth rates. I think we could be worth over $100 billion with a tiny fraction of Lockheed's revenue. So I- I- I'm incredibly bullish on.... you know, the- the path that we're heading down and the- the speed at which we're growing.

    18. HSHarry Stebbings1:13:27

        You know, you hate memos, but in memos, that you always write a kind of post-mortem, uh, a reason why, or pre-mortem, a reason why it won't work. If there was one for Anduril, what would it be?

    19. TSTrae Stephens1:13:37

        I'll give you two, and I'll do it quickly. The first is, like, if we build something and we ship it and it doesn't work, um, we deserve to be crushed by the market. Uh, unfortunately, I don't think that actually happens. I think that the- uh, the big defense companies are constantly delivering things that don't work like they're supposed to and they're never punished for it. Uh, you can see this with, like, the way the- the 737 Max has been going for Boeing for a long time. Um, so that's- that's one way that I think it could, in theory, go south. The other way is that, uh, government cultural risk. It's like we're coming to them with a very different business model, um, and the only way that we win at a scale that we're working to- towards winning is if we win major, multi-decade-long programs, like core military platforms, um, and there will have to be people with courage inside the government to make a decision to go with a new player, to, you know, build a next generation fighter plane or a next generation counter air missile or whatever.

    20. HSHarry Stebbings1:14:33

        Final one. Where do you want to be in 10 years? It's 2034. Where is Trey then?

    21. TSTrae Stephens1:14:39

        My goal is to stay super opportunistic and not allow my current desires to over-determine my future. Um, but that said, I will come back to a point that I earlier said. I am- I am deeply committed to the idea of civil service, um, and I don't know if it's in five years or 10 years or 15 years, but at some point, I wanna be back, uh, as a public servant, uh, working for the good of our nation and our allies and partners. And there are a lot of ways that I could do that, uh, and I'm- I'm very open to- to going down that path.

    22. HSHarry Stebbings1:15:11

        And post-10 years, we can fit another Kerry cycle in as well, so very strategically timed. (laughs)

    23. TSTrae Stephens1:15:17

        (laughs) It could happen sooner. It could happen in five years. I don't know. We'll see what happens.

    24. HSHarry Stebbings1:15:21

        I just saw, uh, Arnold Schwarzenegger's "I'll be back" when you said that.

    25. TSTrae Stephens1:15:25

        (laughs)

    26. HSHarry Stebbings1:15:25

        So, uh, (laughs) Trey-

    27. TSTrae Stephens1:15:27

        Exactly.

    28. HSHarry Stebbings1:15:27

        ... I've- I've loved doing this. Thank you so much for being so great, and this has been so much fun.

    29. TSTrae Stephens1:15:32

        Awesome, thanks Harry. (laughs) I appreciate it, man.

Episode duration: 1:15:35